Update: Netflix Profits Up As It Shifts Into Streaming

Netflix continued to improve, gaining subscribers for the quarter and recording healthy profits and revenue. The percentage of its customers who watched streaming video also skyrocketed, evidence that the company's shift toward streaming is on target.

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Netflix continued to improve, gaining subscribers for the quarter and recording healthy profits and revenue. The percentage of its customers who watched streaming video also skyrocketed, evidence that the company's shift toward streaming is on target.

Netflix reported net income of $43.5 million for the second quarter of 2010, on revenue of $519.8 million. Net income grew 34 percent from a year ago, and revenue also increased by 27 percent from the same period last year.

Netflix also recorded growth in its subscriber base, adding a total of 3.06 million to the Netflix ranks, to a total of just over 15 million subscribers. About 10 percent of that subscribes to the Blu-ray service, executives said.

"Our rate of subscriber growth continues to accelerate and we added more than a million net new subscribers for the third consecutive quarter," said Netflix co-founder and chief executive Reed Hastings, in a statement. "Consumers are clearly enthralled by our offering of unlimited movies and TV shows streamed over the Internet."

Netflix also said that the percentage of subscribers who viewed its "Watch Instantly" streaming video, or more than 15 minutes of a TV episode or movie, sometime during the second quarter was 61 percent, versus 37 percent for the same period a year ago, and 55 percent for the first quarter.

Virtually all users subscribe and use the disc service, which gives access to the latest releases, as well as stream video, Hastings said in a conference call.

Netflix gave detailed guidance for its third and fourth quarters, predicting net income of $33 million to $40 million on revenue of $546 million to $554 million for the third quarter, on 16.3 million to 16.7 million subscribers; and $32 million to $40 million in net income for the fourth quarter, on $580 to $596 million in revenue, with an estimated subscriber base of 17.7 million to 18.5 subscribers.

"For the last two quarters, the
acceleration of our growth has been astounding, driven by the increasing appeal of streaming," Hastings said in a statement. "This kind of rapid acceleration is unlikely to continue for long, but as our guidance for Q3
implies, we do see it continuing in the third quarter...
We'll know more about Q4 in October, but for now we are being prudent in forecasting that we'll
maintain an amazing 48 percent annual growth rate for Q4."

Hastings also confirmed that the company's direction was evolving from a DVD-by-mail supplier into streaming. As a result, the company is seeking out more content deals.

"As we evolve from DVD by mail into streaming, the role of exclusive content changes," Hastings added. "Exclusives in the DVD arena don't work because of the First Sale copyright doctrine, but are a
core part of the Pay-TV market into which we are growing. To date, we've been an outlier in the
Pay-TV segment by not having any exclusive content. At this point we can start to afford some
major TV shows and movies on an exclusive basis, and plan going forward on a mix of more-
expensive exclusive content and lower-cost non-exclusive content. Our willingness to license
some higher-priced exclusive content will open up new licensing opportunities for us."

Interestingly, Hastings also noted that Netflix will eliminate the disc from its Netflix Watch Instantly service for the PlayStation 3 by October, meaning that updates will be pushed automatically. The Wii, however, will remain a disk-based service because of technical restrictions, executives said.

Editor's Note: This story was updated at 3:56 PM PT with additional comments from the conference call.

Mark Hachman Mark joined ExtremeTech in 2001 as the news editor, after rival CMP/United Media decided at the time that online news did not make sense in the new millennium.
Mark stumbled into his career after discovering that writing the great American novel did not pay a monthly salary, and that his other possible career choice, physics, required a degree of mathematical prowess that he sorely lacked.
Mark talked his way into a freelance assignment at CMP’s Electronic Buyers’ News, in 1995, where he wrote the...
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